More Transportation Spending: False Promises of Prosperity and JobCreation

With the economy
slowing and flirting with reces­sion, many Members of Congress
and several presi­dential candidates have been advocating a
second, costly stimulus package that would rely more on
gov­ernment spending than on stimulating private spend­ing
with tax cuts. In many of these proposals, a portion of the new
spending would go to infrastruc­ture, with some or all of it
targeted to transportation projects. As is often the case, many of
the leading tax users in the field of transportation-the American
Association of State Highway and Transportation Officials (AASHTO),
the American Road and Trans­portation Builders (ARTBA), the
American Public Transportation Association (APTA), and the
Associ­ated General Contractors-have urged Congress to spend
more money on projects that would directly benefit their
members.

As this paper
demonstrates, most of the alleged economic benefits are based on
grossly exaggerated claims made by a U.S. Department of
Transportation (USDOT) computer simulation conducted in 2000 and
2002. In fact, the vast majority of independent academic and
federal government studies on the rela­tionship between
infrastructure spending and eco­nomic activity have found that
the impact is very modest and long in coming.

Lobbyists Clamor
for More Spending

Typical is a
recent statement by AASHTO Executive Director John Horsley in which
he proposed that gov­ernment provide $18 billion in new
transportation spending to create 750,000 new jobs. Presumably,
these figures are based on the exaggerated USDOT simulation that
each $1 billion of new transporta­tion spending would create
47,000 new jobs. He also claimed that more than 3,000
transportation projects could be awarded and started within 30 to
90 days, suggesting that if they were this close to being started,
they were probably also funded by current state transportation
budgets.[1]

An ARTBA vice
president told the House Demo­cratic Caucus that "protecting
the solvency of the highway trust fund…was one of the most
effective ways to facilitate economic recovery" and later noted
that a gas tax increase was one way to do this.[2] APTA complains that
the proposed $1 billion for transit projects was dropped from the
stimulus package (H.R. 5140) before passage and recommends that its
$3.6 billion spending plan for its members be con­sidered as
part of any subsequent package.[3]

Several
presidential candidates have included infrastructure and
transportation spending in their proposed stimulus packages.
Senator Barack Obama (D-IL) has proposed a new federal
infra­structure bank that would spend $60 billion over 10 years
(equal to $20 per year per person) on high­ways and other
projects to create 2 million new jobs.[4] Senator Hillary Clinton
(D-NY) proposed to increase annual spending on public transit by
$1.5 billion and annual spending on passenger rail (Amtrak) by $1
billion,[5] while former Republican presidential
candidate Mike Huckabee repeated- and misrepresented-the claim that
$1 billion in "federal highways and transit infrastructure" creates
47,000 jobs in announcing "The Huckabee Plan: Four Guiding
Principles for Strengthening Amer­ica's Infrastructure."[6]

Congress is also
getting involved in the spending spree. In his statement on the
budget resolution for fiscal year 2009, Senate Budget Committee
Chair­man Kent Conrad (D-ND) announced that he had allowed room
for stimulus spending in his budget proposal, including an
unspecified sum for high­ways. Following the lead of the
highway lobbyists, the Senator claimed:

[M]ore than 3,000
"ready-to-go" infrastruc­ture projects were identified. An
investment in these projects will not only repair roads and
bridges, but it will create jobs and improve economic growth, and
start the pro­cess of reversing the Bush administration's
underfunding of infrastructure.[7]

Yet these many
claims that highway spending can quickly create jobs and spur the
economy are highly questionable given the mixed findings of decades
of independent academic studies on the relationship between federal
spending programs and job creation. Only one substantive "study,"
which was commissioned by the U.S. Department of Transportation,
asserts much of an impact on job creation, and the study's authors
heavily qualified that claim, recognizing that the results were
pro­duced using highly artificial assumptions in the computer
simulation. Indeed, a careful review of the USDOT study reveals
that many proponents of highway spending exaggerate its ability to
predict the number of jobs created by additional spending.

The USDOT Study

Many of these
claims for job creation are drawn from a computer simulation
conducted in the early part of this decade by several researchers
under con­tract with USDOT. The simulation calculated that each
$1 billion of highway spending by the federal government would lead
to what USDOT analysts describe as "employment benefits" totaling
47,576 person-years.[8] The study used USDOT's JOBMOD Employment
Estimation Model, an input/output (I/O) model of the highway
construction sector of the U.S. economy, to calculate the
employment effects of additional highway spending as follows:

Third-round effects of 21,052
person-years, resulting from spending by the workers employed in
the first two rounds on consumer goods (e.g., DVDs, Big Macs,
baseball caps, hockey tickets, bourbon, socks, magazines, and home
repair).

As the $1 billion
of federal highway spending works its way through the economy, this
input/out­put analysis contends that the money will produce the
equivalent of 47,576 jobs for one year.

Notwithstanding
the extent to which Senators, lobbyists, and the media tout the
number of new jobs that the bill "creates" for every extra $1
billion spent, the words "new" and "create" appear only
infrequently in the study's lengthy written report about the
operation and results of the model. Often, it refers to ambiguous
"employment benefits."

Such cautionary
statements are appropriate because the analytical approach and
mathematical model used to calculate these employment benefits have
only a limited capability to make firm predic­tions on new job
creation. Indeed, in an introduc­tory section, the report
carefully hedges its predictions with statements such as "assuming
there is slack labor supply, each construction project cre­ates
a number of new jobs directly."

Such
qualifications are particularly justified given that the
mathematical model used by USDOT-traditional I/O analysis-is little
more than a comprehensive technical description of the quantities
of materials, supplies, and labor that are needed to make a certain
product. This model does not accurately describe the complex
workings of a market economy in which, each moment, thou­sands
of participants make millions of choices involving hundreds of
thousands of services and commodities, all in limited supply. In
the real econ­omy, more of one thing means less of another in
the short run as individuals and businesses substitute one product
for another in response to changing prices. USDOT's traditional I/O
analysis does not consider such offsets and substitutions.

For example,
using the job-creation numbers provided by JOBMOD, an additional $1
billion in highway spending requires an estimated 26,524 additional
workers[9] to build and supply $1 billion worth of new
highways. In the real world, the addi­tional federal borrowing
or taxing needed to pro­vide this additional $1 billion means
that $1 billion less is spent or invested elsewhere and that the
jobs and products previously employed by that $1 bil­lion thus
disappear. Regardless of how the federal government raised the
additional $1 billion, it would shift resources from one part of
the economy to another, in this case to road building. The only way
that $1 billion of new highway spending can create 47,576 new jobs
is if the $1 billion appears out of nowhere as if it were manna
from heaven.

USDOT's I/O model
could be used to approxi­mate such substitution effects, but
the department did not incorporate these considerations into the
study; hence, the professors prefaced their report with the
condition "assuming there is slack labor supply"-economists'
equivalent of manna. At the height of I/O analysis, as used during
the 1970s in the centrally planned socialist economies of Eastern
Europe and the Soviet Union, the operation of these models
explicitly considered such substitution effects. Without markets
and prices to allocate these countries' scarce resources,
government central planners had to consider the full implications
of taking from one sector to give to another.

For example,
building a new hydroelectric dam would require tens of thousands of
cubic yards of concrete, thousand of tons of rebar, dozens of
bull­dozers, thousands of workers, and so forth. With­out
free markets to allocate and produce these products by signaling
supply and demand through price changes, government central
planners used I/O models to calculate from which sectors to take
the needed labor and supplies. This also allowed the government
planners to determine the implications of such withdrawals: how
many new apartments, roads, warehouses, missile silos, farm
tractors, and other outputs would be sacrificed to build the hydro
project.

With the collapse
of most centrally planned economies, the use of I/O analysis is now
confined largely to economic consultants hired to justify costly
and underutilized building projects such as convention centers and
football stadiums because they will "create" jobs. In fact, such
projects never create anything approaching the benefits projected
through the misuse of these models, but there always seem to be
local boosters, businessmen, and politicians who are willing to
exaggerate the poten­tial benefits.

Because of these
inherent limitations, I/O models such as the one used by USDOT
should be used with great caution, and their limitations and
artifi­cial assumptions should be clearly acknowledged. When
these conditions are considered, the job-cre­ation potential of
any spending scheme will be found to be a small fraction of what
such models initially report.

Although the
USDOT report made only passing and oblique references to such
limitations and drawbacks, a number of other federal studies
inves­tigating the same or similar types of spending explicitly
acknowledged such deficiencies. These studies-including three other
studies discussed in this paper-concluded that the job-creation
poten­tial of government infrastructure spending is
sub­stantially less than that reported by USDOT.

The Congressional
Research Service Study

Using a different
I/O model, an earlier Congres­sional Research Service (CRS)
study reported a much more cautious and qualified estimate of the
potential of highway spending to create jobs.[10] Although the CRS
study found similar first-order and second-order effects-24,300
jobs versus USDOT's esti­mated 26,524-it clearly states in its
summary and conclusion that losses elsewhere in the economy would
likely offset these employment gains:

To the extent
that financing new high­ways by reducing expenditures on other
programs or by deficit finance and its im­pact on private
consumption and invest­ment, the net impact on the economy of
highway construction in terms of both out­put and employment
could be nullified or even negative.[11]

In effect, the
CRS study acknowledges that the substitution effects of the new
highway spend­ing could more than completely offset the
first-order and second-order employment benefits from such
spending.[12]

Similarly, any
tax increase to fund an equal amount of highway spending would
certainly sub­stantially offset the impact, and output and
employ­ment could be nullified or even negative. For example,
the National Surface Transportation Policy and Revenue Commission's
proposal to increase the federal fuel tax by up to 8 cents per
gallon per year for five years and then link it to the rate of
inflation in subsequent years would reduce personal incomes by $204
billion over the next five years. In turn, this reduction in income
would reduce personal con­sumption expenditures and eliminate
the jobs of the workers who provided the lost goods and services.[13]

The General
Accounting Office Study

In contrast to
the USDOT and CRS studies, which rely on similar models to predict
likely employment impacts of highway spending, a Gen­eral
Accounting Office (GAO)[14] study examined the historical record to
determine the actual impact of several federal spending programs on
employ­ment.[15] It also examined the effect of the
spending on the unemployed at the time the programs were launched,
thereby addressing USDOT's qualifica­tion regarding a "slack
labor supply." While the study dates from the early 1980s, the
types of pro­grams and issues examined are similar to those
being debated today.

The GAO study
investigated the employment impact of the Emergency Jobs
Appropriations Act of 1983, which was enacted when the U.S.
unemploy­ment rate was at double-digit levels. The legislation
provided $9 billion ($19.5 billion in 2007 dollars) to 77 federal
programs to stimulate the economy and provide employment
opportunities to the job­less. According to the GAO, its
specific objectives were to:

Provide productive employment for jobless Americans,

Hasten or initiate federal projects and construc­tion of
lasting value, and

Provide humanitarian assistance to the indigent.

These programs
were targeted particularly at those who had been unemployed for at
least 15 weeks.

Although the
program was enacted during the worst of the recession, the GAO
found that "implementation of the act was not effective and timely
in relieving the high unemployment caused by the recession."
Specifically, the GAO found that:

Funds were spent
slowly and relatively few jobs were created when most needed in the
economy. Also, from its review of projects and available data, the
GAO found that (1) unemployed persons received a relatively small
proportion of the jobs provided, and (2) project officials' efforts
to provide em­ployment opportunities to the unemployed ranged
from no effort being made to work­ing closely with state
employment agencies to locate unemployed persons.[16]

Of relevance to
the potential impact of highway spending alone, the study also
notes that "funds for public works programs, such as those that
build highways or houses, were spent much more slowly than funds
for public services."[17] This is under­standable given the
long lead time between the decision to build and the actual
beginning of con­struction. For the typical federally funded
road, environmental impact studies, construction plans, land
acquisition, competitive bidding, and award­ing of contracts
can take several years. In some instances, the environmental
permitting process can exceed five years.[18] Because of such delays,
any employment effects related to additional highway spending would
not occur for several years, thereby providing only a few jobs to
those who were unem­ployed when the bill was enacted.

As far as the GAO
was able to determine, less than 1 percent of the jobs created by
the economy during the relevant period could be attributed to the
program:

GAO estimates
that as of March 1984, 1 year after the act was passed, about
34,000 jobs in the economy were attributable to the act's funds
spent at that time. The employment increase attributable to the act
peaked at about 35,000 jobs in June 1984 when about 8 million
persons were unemployed. These additional jobs represented less
than 1 per­cent of about 5.8 million jobs created by the
economy since the act was passed. After June 1984, the additional
employment attribut­able to the act began to decline and had
decreased to an estimated 8,000 jobs by June 1985.[19]

Obviously, these
estimated job-creation impacts, all drawn from actual experience,
are substantially less than those predicted by the USDOT study.

In the end, the
35,000 new jobs created by the Emergency Jobs Appropriations Act of
1983 came at a taxpayer cost of $257,142 per job ($546,136 in 2007
dollars). Under the circumstances, hiring the unemployed to dig
holes in the morning and fill them up in the afternoon would have
been far more cost-effective.

The Congressional
Budget Office Study

The Congressional
Budget Office (CBO) has also looked into the relationship between
federal spend­ing and job creation and other economic benefits.
Based on the evidence adduced during its review, it concluded that
the connection is relatively weak.[20]

In contrast to
the USDOT, CRS, and GAO stud­ies, the CBO study was a
comprehensive review of a large number of academic studies on the
subject conducted by individuals and institutions during the
preceding 10 years. Although these studies approached the economic
impact of infrastructure spending from slightly different
perspectives using a variety of estimation techniques, the overall
opinion was that the evidence on the effect of federal
infra­structure spending on job creation was inconclu­sive.
For example, in a 1997 review of 15 separate studies on the state
and local impact of highways, eight studies found a statistically
significant and positive impact, and seven found negative or
insig­nificant results.[21]

The CBO review
also cited a 1996 study com­missioned by the Federal Highway
Administration (FHWA), which found that the federal highway program
produced extremely high benefits in its early days, but that the
value of these benefits declined as the interstate system neared
comple­tion. At this point, further federal investment in
highways was estimated to be less productive than private
investment in general. Other studies found that federal money
sometimes merely displaced state and local money that would have
been spent on the project anyway. The CBO concluded:

The available
information suggests three conclusions: some investments in public
infrastructure can be justified by their bene­fits to the
economy, but their supply is lim­ited; some (perhaps
substantial) portion of federal spending on infrastructure
displaces state and local spending; and on balance, available
studies do not support the claim that increases in federal
infrastructure spending would increase economic growth.[22]

Other Studies

A report prepared
by two academic researchers for the FHWA in 2003 found that the
impact of additional highway investment on the economy waned over
time, perhaps reflecting the consider­able benefits derived
from the completion of the interstate highway system in the early
1980s and the less focused federal highway spending that has
occurred since then. As the report's summary notes:

Using a simple
general equilibrium model the researchers estimate the net rate of
return for highway capital investment over the period from 1949 to
2000. The net rate of return is found to be about 34 percent on
average from 1949 to 2000. This rate of return however is found to
be only 14 per­cent in the period 1990 to 2000 implying that
there is not an underprovision of high­way infrastructure
capital.[23]

Several years
earlier, the same two researchers published an extensive study that
was part of a large symposium (partly funded by the FHWA) on the
economic return of transportation investment. Like several others
who have examined the subject, they found that benefits were higher
earlier and declined over time, that benefits accrue over the long
run, and that short-term changes in highway capital con­tribute
only minimally to growth. The following are among the study's
conclusions:

"There is some evidence of increasing returns to scale in most
industries and at the national level. Both at the industry and
national levels, the con­tribution of private capital to
economic output dominates that of total highway capital or NLS
[Non-local System] capital by almost four times. This is in sharp
contrast to the results reported in the literature."[24]

"The results indicate that net social rate of return on total
highway capital was high (about 35 per­cent) in the 1950s and
1960s, then declined considerably until the 1980s to about 10
per­cent. The same pattern holds for NLS capital although the
net social rates of return are higher for NLS, approximately 16
percent. In the 1980s the rates of return on total highway capital
and private sector capital seem to have converged, and are
basically equal to the long term rate of interest."[25]

"The ratio of optimum to actual highway capital, measured by
either total or NLS highway capital, was high in the 1950s and then
declined throughout the 1960s as construction of the
Inter­state Highway System neared completion."[26]

"The main contributor to productivity both at the industry and
aggregate level is aggregate demand. Relative prices, the capacity
utilization rate and technical change also contribute to the growth
of TFP [Total Factor Productivity], but their contributions are
generally smaller and vary across industries. The contribution of
highway capital is to long run trend TFP growth and only minimally
to its acceleration or deceleration over different periods such as
the period 1973-76."[27]

Creating Jobs vs.
Creating Value

The CRS, GAO, and
CBO studies conclude that the impact on jobs would be much less
than the 47,000 new jobs per $1 billion in new highway spending
implied by the USDOT simulation. How­ever, none of these
studies questioned the extent to which job creation should even be
a high priority of any federal program. Most federal programs were
created to meet a particular need that Congress believed government
should address in the interest of the general welfare. Food stamps
feed the poor, Medicare helps the elderly with medical costs, and
the Department of Defense protects America from external threats.
To the extent that elusive efforts to create jobs compromise these
goals, scarce taxpay­ers dollars are wasted.

Have you noticed
that most proposals to change some element of Federal economic
policy-ranging from a minor tax provision to building public
infrastructure to changes in trade restrictions-are debated at
least in part in terms of how many jobs they will cre­ate? Will
these proposals really create jobs? If so, why not just keep adding
new programs until full employment is achieved?[28]

Lost in the
job-creation debate is the fact that the federal transportation
program is supposed to be about transportation, mobility,
congestion mitiga­tion, and safety-not job creation. To the
extent that these goals are sacrificed to some illusive
job-cre­ation process, the program becomes less effective, if
not irrelevant, and ought to be scrapped rather than be allowed to
continue to waste the taxes paid by beleaguered motorists.

Furthermore,
arguments for a costly commit­ment to a highway-based stimulus
package cobbled together by a handful of lobbyists for the benefit
of their members and clients fail to recognize that cre­ating
jobs is not the same thing as creating value. Spending any sum of
money on nearly anything will contribute to a job, but whether or
not that job leads to the creation of products and services of
broad public value is another question. Hurricanes, torna­does,
and forest fires create large numbers of jobs, but they also
destroy value in the process-an out­come not materially
different from much of today's federal spending on costly and
underutilized light-rail systems and pork-barrel earmarks.[29]

Ronald D. Utt, Ph.D., is
Herbert and Joyce Morgan Senior Research Fellow in the Thomas A.
Roe Institute for Economic Policy Studies at The Heritage
Foundation.

[1] American Association of
State Highway and Transportation Officials, "Highway Investment:
The Road to Economic Recovery," March 3, 2008, at www.transportation.org/news/96.aspx
(March 26, 2008).

[8] The USDOT study that was
used to provide the employment estimates is in fact a series of
studies completed between June and December 2000 by two professors
at the Boston University Center for Transportation Studies under
subcontract to Battelle Memorial Institute. In turn, some of the
results of these studies were incorporated into an employment
estimation model (JOBMOD, version 1.1) and made available for use
in 2002. Several studies were provided to the Federal Highway
Administration. The most relevant is Boston University, Center for
Transportation Studies, Evaluating Federal-Aid HighwayConstruction Program Employment Impacts and Productivity Gains,
Final Report B (Revised): Comprehensive Employment Estimation
Model, June 2000, revised December 2000. The summary findings
of JOBMOD (version 1.1) are incorporated into U.S. Department of
Transportation, Federal Highway Administration, Introduction to
JOBMOD, A Federal-Aid Construction Spending Income and Employment
Estimation Model.

[9] This number includes
only first-order and second-order effects. The third-order effects
are excluded because they are irrelevant in this brief
analysis.

[10] David J. Cantor,
"Highway Construction: Its Impact on the Economy," Congressional
Research Service Report for Congress No. 93-21E, January 6,
1993.

[12] The summary mentions
only potential substitution effects from spending shifts and
deficit finance and is silent on how a tax increase could affect
employment because the U.S. economy was in recession at the time,
and a tax increase was not an issue. Ironically, Congress raised
the federal fuel tax by 4.5 cents in 1993 to facilitate deficit
reduction, not road construction. In 1997, the proceeds from that
tax increase were redirected to the highway trust fund.

[29] For one obvious
example (massive federal spending on public transit), see John
Semmens, "Public Transit: A Bad Product at a Bad Price," Laissez
Faire Institute for Economic and Policy Studies Issue
Analysis, January 2003, pp. 11-12.